European Energy Sovereign Wealth Fund Needed

THE blog met with an old friend on its recent trip to the UK, a scientist, who moaned about her local MP’s ignorance about why energy self-sufficiency was vital for any economy.

“He is opposed to shale gas and shale oil because of all the concerns about fracking causing earthquakes and water contamination,” she said.

“This is all debatable, of course, there are some genuine concerns where the industry isn’t properly regulated, but when I talked to him about the economic benefits delivered to Britain from North Sea oil and gas, he looked at me rather blankly.

“I went away and wrote him a long letter explaining that any hydrocarbon exploitation is always a balance of environmental concerns versus the economic benefits.”

But she conceded that even if her MP eventually gets it on how greater domestic oil and gas availability, via shale gas, could help to boost the UK now that North Sea hydrocarbons production has peaked, he might still remain opposed to fracking for one reason and one reason only: House prices.

Individual wealth creation in the UK, especially in the Southeast of the country, has been built on the extraordinary boom in house prices over the last 17 years.

And the problem in the UK is that if you own land, you only own the surface soil and not the sub-soil. Thus, if shale gas is discovered on your land, you won’t gain any economic benefit.

At the same time, of course, if a shale-gas well is located just down the road from where you live, the price of your house is likely to decline.

“Here in Texas, and across the rest of the US, individuals do own the sub-soil and so there is every bit of incentive for individuals to speculate in shale gas,” said a Houston-based executive who works for an oil and gas major.

“Plus, the environment in some parts of Texas is already pretty messed up and so we are not too bothered about the impact of shale gas – and house prices have never really taken off here, even in the sub-prime boom.”

In Europe, too, the sub-soil belongs to the state rather than the individual – hence, one of the biggest worries over shale gas in Germany is what it might do to the purity of water and therefore the country’s beer industry.

We don’t want to appear over-cynical here as, of course, there are genuine environmental concerns over fracking, particularly around methane emissions.

Peter Spitz, the founder many years ago of consultants Chem Systems, raised the issue of methane emissions via shale gas and oil in a recent post on his chemengineeringposts blog.

Spitz said current estimates of methane emission levels vary from 1-2% of natural gas production (the estimate from the US Environmental Protection Agency and 6-12% based on samples taken by aircraft flying over gas fields. The lower estimate puts emissions from oil and gas production in the US below worldwide methane emission levels from livestock.

“At the higher levels, using natural gas instead of coal would result in a more harmful GHG [greenhouse gases] situation,” Spitz said.

“All of this does not even consider the release of methane from Arctic permafrost and methane hydrates in the ocean waters as global warming proceeds,” he added.

But when economic incentives vary so dramatically between the US and Europe, anything close to an objective debate about the risks versus the rewards of shale gas and oil seems just about impossible.

The answer in Europe, we think, should be an agreement to set up an EU sovereign wealth fund, or a series of national sovereign wealth funds, that would invest the tax proceeds from shale gas and shale oil and exploitation. Some of that wealth would then be channelled back to individuals and be used to fund scientific solutions to the environmental problems created by hydrocarbons in general.

You may disagree, but Europe needs a hydrocarbons solution, and needs a solution fast, as the geopolitical crisis in Ukraine has further underlined. What are the odds on Russian gas supplies being cut off this winter?